"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, May 11, 2011

China still struggling against inflation

Look for continued buying in the gold market coming out of China as that nation contends with serious inflation problems. Their version of the CPI showed a gain of 5.3% in April, down from 5.4% in March, but above what most of the market was looking for (5.2%). Keep in mind that real rates in China are currently negative on one year savings accounts.

This helps explain why gold is holding much better than silver right now. Silver is being seen as a speculators' playground while gold is keeping with its historic role as a safe haven. The reason for its downdraft today is related to hedge fund selling algorithms which blindly sell every single commodity across the board with no discrimination whatsoever.

Such things are welcome in Asia as opportunities.

Gold has bounced back above $1500 in late session trading as the session nears an end in New York. Silver is currently acting as a drag on gold but if it can hold above $35, gold should bounce moving into Asian trading this evening as the margin related selling winds down.

XAU needs to find support very soon

The large cap mining stocks continue to get obliterated as evidenced by the XAU which is now perched precariously above a critical support level on the weekly chart. The entirety of the gains of 2011 have now been erased by this continued ratio spread trade which will not let up.

To give you an idea of how obscene this trade has become, when the XAU was trading at today's levels back in January of this year, gold was trading in the low $1300's!

What is astonishing is the silence of far too many mining company CEO's while their stock value is getting systematically destroyed. A bounce in the metals should bring some valued based buying into the mining shares particularly at these levels. 

Gold - 4 Hour chart update

Gold made it back above the 50% Fibonacci retracement level of its most recent decline from its record price but was unable to maintain its footing over that level. That led some of the longs to bail out and enticed some short selling. Price then fell below $1500 once again which will need to be regained to give the bulls the edge in this market.

Gold is caught in a tug of war beween speculative selling related to hedge fund algorithms and safe haven buying on account of sovereign debt fears in Europe. In terms of the Euro, while it is weaker today, it is actually holding fairly well compared to the massacre across the rest of the commodity complex.

I am optimistic that this market is entering a consolidation phase and is carving out a new trading range. Right now we have $1520 on the top and $1460 on the bottom until we get some subsequent levels to form on the chart.

Silver - 4 hour chart

Risk-off trades have returned with a vengeance today. I believe a fair amount of the selling is tied to hedge fund panic type selling related to the conviction of a hedge fund manager on insider trading violations. That seems to have terrified the hedgies and has them running out of everything with the exception of the US Dollar. It has also put a mild bid back into the bonds (once again - everytime they appear to get ready to rollover, they are resuscitated - more evidence that the US bond market is the largest rigged market on the planet right now - these things have more lives than a cat). It is my firm conviction that the US monetary authorities are doing everything in their power to break the back of the commodity rally and prop up the rotten and utterly worthless paper IOU market (Treasuries). They are fully at war with the speculative community.

Silver, after briefly moving back above $39 in Asian trading, was once again obliterated. Ditto for the energies, gasoline in particular, which dropped so sharply at one point during the trading session, that trading was halted and then reopened under extended trading limits. Consumers will of course welcome this sell off.

One can now make the case that a bearish flag formation has been formed on the daily silver chart but I should note here that it still remains well above the recent low near $33. Additionally, a large number of longs have already liquidated their positions in this market meaning that those who bailed out down near $34 and under are already gone and are no longer around to provide downside fuel from their selling. Open interest readings indicate that a decent number of new shorts were also blown out of the water leading me to believe that this market is very soon going to begin consolidating and working sideways as only the bravest, or perhaps the most foolish, are going to be placing large bets in the silver market any time soon. Trading this market in size is a guaranteed, sure-fire way to become bankrupted. My counsel is to forget about figuring how much money you might be able to make on your trading positions and begin worrying about how much you might lose.

As said in yesterday's post, this market is running on wild swings in emotion bordering on near despair to wild-eyed optimism. Markets like this are to be avoided in size (if you are going to trade them, trade small) until they calm down and begin consolidating which lets them wring out this idiotic emotion. I will welcome a move that drifts down towards $34 if that happens to see how the market reacts to this level once again and to give us a chance to see whether or not the bottom forged near $33 is a good one. For now, we have a bottom at $33 and a top at $39 which is the new trading range until proven otherwise. There is a chance that $35 could hold on the downside depending on how much further the Dollar can rally.

You will note that silver did make it up to the 38.2% Fibonacci retracement level before it failed so from a technical standpoint it is producing fairly accurate readings on the chart right now.